3.16 Query
Purchase or sale for cash from companies in which Directors are interested. A company purchased goods from another private company in which some of its directors were interested as directors. The goods were purchased at prevailing market prices. The auditors of the company in course of audit raised an objection that in respect of the above transaction provisions of section 297 read with Section 301 of the Companies Act, 1956 would apply. They also pointed out that the exemption as contemplated in Section 297(2) would not be available, as cash was not promptly paid against delivery. The company contends that such transactions are exempted by section 297(2) (a) which reads as follows: -
“Nothing contained in clause (a) of sub-section (1) shall affect- (a)the purchase of goods and materials from the company, or the sale of goods and materials to the company, by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices;……….. The company contends that as the goods are purchased at prevailing market prices for cash consideration, exemption of Section 297(2) would be available and so Sections 297(1) and 301 would not be applicable. It further states that the words ‘for cash’ as appear in the exemption clause mean for cash consideration and that cash need not be paid immediately on delivery.
We would like to know what is the true significance of the term ‘for cash’ as it occurs in 297(2 (a). Does it convey the meaning of prompt cash payment against delivery or does it mean that the consideration for sale/purchase needs to be settled in the form of cash only either at the time of delivery or subsequently on the basis of the credit terms.
Opinion July 21, 1969
(1)In the opinion of the Committee, the term “ for cash” as used in Section 297(2) (a) of the companies Act 1956 signifies payment of cash against delivery. Delivery against normal terms of credit would not, in the opinion of the Committee, represent a sale “for cash” . (2)However, the term “cash” must be interpreted in a reasonable manner. It would include not only payment in legal tender but also other modes of payment, which are recognised by law or by customary practice as amounting to payment in cash. For example, payment by cheque or through a bill or hundi which is payable on demand would be tantamount to payment in cash. Similarly, according to opinion given by an eminent legal counsel, payment by way of set-off against dept or liability which is itself immediately payable could also be treated as payment in cash. On the other hand payment through the issue of a usance bill or hundi cannot be regarded as payment in cash. (3) Although this point has not been raise by the querist, reference may be made to Section 299 of the Companies Act which would have an application under the facts stated by the querist, even though Section 297 is not applicable because the purchase of goods is effected for cash at prevailing market prices. Since the purchases are made from a private company in which some of the Directors of the purchasing public company are also Directors, the contract of purchase would have to be entered in the Register of Contracts under Section 301, Moreover, there would need to be disclosure of interest by the Director concerned under Section 299 of the companies Act. ________________________
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